Can You Eliminate Tax Debts in Bankruptcy?

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Can you eliminate tax debts in bankruptcy? In many cases, a taxpayer is still liable for tax debts after bankruptcy. However, bankruptcy law allows the discharge of tax debt only in some circumstances.

A tax debt is more likely to be discharged in Chapter 7 than in a Chapter 13 bankruptcy. In Chapter 13, tax debt, just like any other debt, is paid back on a repayment plan. Chapter 7 bankruptcies allow a debtor to discharge or wipe out debts, including federal tax debt.

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A tax debt is more likely to be discharged in Chapter 7 than in a Chapter 13 bankruptcy.

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Federal tax debt that can be wiped out, depending on the type of tax debt and certain conditions under Chapter 7 bankruptcy, such as:

• The tax must be for income taxes. Payroll taxes and penalties for fraud are not eligible for discharge.
• The tax returns for the debts must have been filed two years before filing bankruptcy.
• The tax liability is at least three years old. In other words, the tax debt is from a tax return that was originally due at least three years before filing bankruptcy.
• The IRS assessed the tax debt at least 240 days before the debtor filed for bankruptcy.
• The taxpayer did not commit willful tax evasion. Possible evasive actions include changing your Social Security number, your name, the spelling of your name, repeated failure to pay taxes, filing a blank or incomplete tax return, and withdrawing cash from a bank account and hiding it.
• The taxpayer did not commit tax fraud.

Penalties on taxes can also be wiped out in bankruptcy. After the discharge of the tax liability, the taxpayer is no longer responsible for paying the taxes and the IRS may not garnish wages or bank accounts.

Even if the discharge of tax debt occurs under Chapter 7, if the IRS placed a federal tax lien on the taxpayer’s property prior to the bankruptcy case, it will remain after discharge. As a result, it is necessary to clear the title by paying off the lien before selling the property.

There are tax debts that are not eligible for discharge, such as tax debts from unfiled tax returns and trust fund taxes or payroll taxes withheld from employee’s paychecks by the employer. If a taxpayer is not able to discharge the tax debts under Chapter 7, he or she should consider an installment plan or offer in compromise to settle the tax debt with the IRS.

If you think you can wipe out your federal taxes under bankruptcy, you should hire a qualified tax problem specialist. We have experience and strategies negotiating with the IRS. If you have any questions, give me a call or send me an email. I would be happy to help you!